Crisis-Era Measure Nears End

WASHINGTON—Small banks are making a last-ditch attempt to persuade Congress to extend a crisis-era blanket guarantee on nearly $1.5 trillion in deposits before it expires at the end of the year.

However, they face long odds of success. Even though the Senate is on track to vote this week to continue the Federal Deposit Insurance Corp. program, Republican leaders in the House are opposed. That makes passage of legislation extending the program into 2013 unlikely, congressional aides said.

Barring action by Congress, the FDIC on Dec. 31 will stop providing an unlimited guarantee on zero-interest bank accounts used by businesses and municipalities for payroll and other services. The guarantee would then revert to the normal $250,000 in insurance per depositor at any given bank.

If the guarantee isn't extended, FBR Capital Markets estimates as much as $250 billion in deposits could flow out of smaller banks to large banks or big money-market mutual funds.

Extending the FDIC program is a top priority for small bankers, who are fearful that their customers will take out their money and move it to larger institutions, which are perceived as having a much lower risk of failure.

But big banks, reluctant to be perceived as needing government help, recently came out in opposition. Extending the program "may create the misperception of instability, at the very time that the financial-services sector has made significant and positive reforms," the Financial Services Roundtable, which includes J.P. Morgan Chase & Co., Wells Fargo & Co. and other large banks wrote in a Nov. 30 letter to lawmakers. The banks declined further comment.

State treasurers, who use the accounts because of their iron-clad FDIC guarantee, are among those pushing for a two-year extension of the program. Maryland's state treasurer, Nancy Kopp, said last week that the looming end to the program already is increasing demand for government-guaranteed securities and pushing down interest rates on those securities. The program "should not be abruptly eliminated from the U.S. banking system," she said.

Senate Majority Leader Harry Reid (D., Nev.) has scheduled a vote on the issue for this week. Proponents had hoped that the measure wouldn't come up for a vote on its own, and were pushing for it to be tacked on to other legislation that must pass before year-end. That option is unlikely, aides said.

Mr. Reid's effort to advance the legislation may help him curry favor with bankers, who are upset about the Dodd-Frank financial overhaul law of 2010.

ENLARGE

The FDIC calculates that the program adds about 3% to the cost of cleaning up failed banks, but hasn't taken a position on whether it should be extended. If Congress lets the program expire, "we think the institutions are in a position to mange that in an orderly way," Martin Gruenberg, the agency's chairman, said last week.

Many Republicans are opposed to an extension. "It's time to move beyond this period of unprecedented government support of the banking industry," Sen. Bob Corker (R., Tenn.) said last month. And House Majority Leader Eric Cantor (R., Va.) "believes we should not continue to extend these taxpayer guarantees and therefore opposes the proposal," a spokesman said Friday.

Michael Bush, chief executive of Mississippi River Bank in Belle Chase, La., says if the program ends, "the community banking industry is going to be very vulnerable" and some weak banks could fail. Mississippi River Bank has $38 million of $130 million in deposits guaranteed under the program, and Mr. Bush says he has been working for months on the issue, obtaining resolutions of support from local organizations and pressing lawmakers.

Robert Cantazaro, president of Independence Bank in East Greenwich, R.I., has $5 million out of his bank's $50 million in deposits guaranteed under the program. He has parked $5 million in an account at the Federal Reserve Bank of Boston so his one-branch bank can handle withdrawals if they materialize.

If the program ends, Mr. Cantazaro said his bank would need to attract money by offering certificates of deposit, paying out interest. Doing so, he said, would be "a dent in our profitability," he said.

But Steve Jennerjohn, chief financial officer of Green Bay, Wis.-based Bay Bank, said his bank will feel only minor effects if the program ends on schedule. "It will cause a few more operational headaches," but it won't cause depositors to leave the bank, he said.

Two companies are offering insurance products to banks designed to help them navigate the potential end of the program. Products offered by StoneCastle Partners LLC and Promontory Interfinancial Network allow depositors to spread out their money through networks of banks and retain a full FDIC guarantee.

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.